The coming week finds the bulls chastened by
last week's dip and facing a slew of data that could swing sentiment further into despair -- or back toward euphoria. Which way the market's mood swings could come down to the state of the all-important consumer, to be revealed in both confidence numbers and earnings reports from several retailers.
On the top-down front, Tuesday brings the February consumer confidence report, from which economists expect a dip to 109.5 from January's 110.3, the highest level in over four years.
"The combination of the nasty winter storms blanketing most of the nation during February and the political discord over
Iraq should drive down consumer confidence a bit for the month," writes Joseph Brusuelas, chief U.S. economist at IDEAglobal. "The reduction in work available due to winter-related disturbances and the diminution in new orders within the manufacturing sector should
also take the edge off ... consumer optimism."
From the bottom's-up perspective, the coming week brings earnings from a diverse group of retailers. Results from discount giant
and department store stalwarts
will provide the broadest insights on the state of the U.S. consumer.
Meanwhile, investors will be looking for signs of whether the better-than-expected January same-store sales at
were anomalous or indicators of better times.
Arguably, the most important report comes from
, whose stock is up over 60% in the past six months and has more than doubled over the past two years. Nordstrom is a leader in a luxury segment that, to date, has suffered no ill effect from a housing slowdown that has crippled comparable homebuilders such as
Nordstrom's results take on added importance because while the U.S. economy is driven by overall consumer spending, said spending is increasingly driven by high-end consumers.
"From a macro perspective, the income distribution has become more uneven in recent years, suggesting that low-income households account for a smaller share of total consumer spending than they used to," writes Torsten Slok, senior economist at Deutsche Bank. "The share of income received by the wealthiest 20% of the population has been rising steadily ... from 43% in 1973 to over 50% in 2005. The share of income received by the poorest 20% of the U.S. population has declined since 1970 from 4.1% of income to 3.4% most recently."
Such statistics help explain why most economists and
officials are less alarmist than the press about recent subprime problems, most recently evidenced by
implosion last week.
Indeed, the subprime space is only a "sliver" of the overall mortgage market, Fed Governor Susan Bies said Tuesday. Furthermore, spending by the increasingly less important (from a macro perspective) low-end consumer is unlikely to be materially damaged by problems in the subprime sector "as long as unemployment remains fairly low," according to Slok.
(On a jobs-related note, February nonfarm payroll data will be released on the second Friday in March, rather than the first as is typical, because February is a short month and the government needs extra time to get it "right" -- before subsequent revisions, of course.)
"There is not at this time a major systemic risk due to the subprime issue, nor should the problems in this corner of the mortgage universe spill over into the broader economy," writes Brusuelas. "Rather, we feel that an unwise policy response among regulators and the political class in Washington poses a far greater risk."
There is evidence of tightening lending standards by banks, presumably at the behest of the Fed and other regulators, which could hurt the economy. Of course, bears such as Doug Kass believe
the subprime "fungus" will absolutely spread into the prime mortgage market, extend the housing downturn and ultimately cripple (or certainly crimp) the broader economy.
Given the presumed significance of the housing market on consumer sentiment and spending, bull and bear alike will certainly be paying close attention to Tuesday's existing-home and Wednesday's new-home sales reports.
Also, Tuesday's durable goods report and Wednesday's ISM Manufacturing Index will give fresh insight into the manufacturing sector, which has experienced a noticeable slowdown of late.
Speaking of slowdowns, Wednesday's preliminary fourth-quarter GDP report is expected to show growth of 2.3% vs. the 3.5% advance reading. The report "will take a bit of the bloom off of the roses that the Fed has tossed to the market recently," writes Brusuelas. "Given the fact that core inflation remains a bit sticky, even with the sub-trend growth that we expect to characterize the first half of 2007, we do not anticipate any Fed action for some time."
Lowered prospects for rate cuts help explain the market's dip last week. As detailed
here, Wednesday's stronger-than-expected CPI report undermined, at least temporarily, the Fed's forecast for slowing core inflation. This Thursday brings the personal income report for January and the accompanying core personal consumption expenditures index. Given that the core PCE is presumably the Fed's preferred inflation indicator, the report could prove to be most critical in a week chock full of events with market-moving potential.
Notes, Notables & Fearless Predictions
Beyond the data, market players will tune in to speeches from Fed Governor Bies on Monday and Dallas Fed President Richard Fisher Tuesday. New York Fed President Timothy Geithner will speak on "Liquidity and Financial Markets" on Thursday.
Outside the retailers, earnings are expected from (among others)
American International Group
and the recently engaged satellite radio outfits
Friday's podcast I discussed how the past few days have brought about considerable hand wringing, a situation similar to what presaged Ben Bernanke's Feb. 14 Congressional testimony and the subsequent rally. It's entirely possible that a similar (bullish) setup is happening here, but I do believe there's more weakness afoot as earnings season winds down and attention focuses on rising commodity prices and the Fed's precarious predicament.
Aaron L. Task is editor at large of TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;
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